How I saved my family $270,000!

What a title!  Honestly the number is more like $267,793.86 but $270,000 sounded so much better.

 

You may be wondering how in the world did YFS (Your Finances Simplified) pull that off?  What did he do?

 

The answer is simple.  I refinanced my home from a 30-year fixed mortgage with a 5.25% annual percentage rate to a 15-year fixed mortgage with an annual percentage rate of 3.375%.

 

I’m kicking myself because we could afford a 15-year mortgage all along but decided to go with a 30-year mortgage for “flexibility”.  Thank goodness we didn’t spend the difference on something frivolous or unnecessary.  So I did what my fellow blogger Ramit Sethi talked about in his article “Use barriers to prevent yourself from spending money“.  I used the 15-year mortgage as a barrier.Details please!   Our current mortgage payment breaks down in the following manner:

 

  • Principal = $488.74
  • Interest = $1,557.17
  • Escrow = $509.44
  • Total Amount = $2,555.35

 

  The new mortgage payment breaks down in the following manner:

 

  • Principal = $1,518.27
  • Interest = $996.96
  • Escrow = $509.44
  • Total Amount  =$3,024.67

 

Why does this matter?  

 

Well, for a long time the 30-year fixed rate mortgage has been amongst one of the most popular loan products because it allows a person to obtain a larger loan and buy a more expensive house or in my case have a sense of “flexibility”.  Because the 30-year fixed rate mortgage allows a person to get into an otherwise unaffordable home loan, this pleases would be home buyers, mortgage lenders and real estate agents.

 

The 30-year mortgage sounds great!…..So what’s the catch!

 

As you can see from the amount I will be saving above there is a significant cost to having a 30-year loan.  In my instance a $270K cost!  So, before deciding on the type of mortgage you will take make sure you weigh the cost and the benefits.  To gain “flexibility” I was going to be paying a whole lot of interest with the 30-year loan relative to the 15-year loan.   The $270,000 saving from refinancing to a 15-year fixed loan results from 2 sources:

  1. A lower interest rate
  2. Paying interest for half the time

 

The interest rate on my 30-year mortgage was 5.25%.  Not bad by any means if you’re speaking historically.  But, due to the current economic and political condition in the USA.  Mr. Bernake stated that interests are holding until 2013. Mortgage rates fell of a cliff!  This is good news for those who are credit worthy.  So I jumped at the free money.  Also, by only paying 180 payments versus 360, I pay a significantly less amount of interest in return for an additional payment amount of $469.32 a month.   But you savvy investors are saying whoa YFS you forgot one thing.  Yes, you save $270,000 in interest with the 15-year loan.  But, you give up the ability to invest that $469.32! When you switched from the 30-year loan.  What about that!

 

YOU’RE RIGHT!

 

An alternative would be to take the 30-year loan and invest the $469.32 so that after 15 years the invested funds would be more than the interest savings and equity build up that the 15-year loan would provide.  Under some circumstances that is the right decision.  But, that’s why personal finance is just that PERSONAL.  Mrs. YFS and I had a talk and weighed the options.  Since we max out our retirement accounts we felt that the best decision would be to pay off our home in 15 years and retire by 40.  So let’s just say instead of putting money into equities we put the $469.32 into a bond that pays a rate of 3.375%.

 

Attention Readers:  How are you taking advantage of today’s historically low interest rates?  Would you have kept the 30-year fixed or refinanced to the 15 year?  Assume it is 15 years later what would you do with the money?

 

 

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21 comments

  • Unfortunately where I live you can't get 30 year mortgages. The max is 7 years. We locked in at 5 years when we bought our house because the rates were so low but typically doing a variable mortgage that changes every year tends to save money over the long run.

    It is always very interesting to see what the differences are between countries.

    If you ask me, you made the right decision.

    • Thank you for your comment.

      I'm not sure how the housing climate would be in the USA if a person was only allowed to get a 7 year mortgage. I would go to say either homes would not be expensive or only the well off would be able to afford one. As for using a variable mortgage in some instances they are better but in this case I would be better off locking in a super lower rate. Interest rates are bound to go up, they can't stay this low forever :-). I'm glad you thought I made the right decision, I was quite happy to save so much in interest.

  • […] Your Finances Simplified – How I Saved My Family $270,000! […]

  • You are comparing the wrong numbers to see if you are doing the right thing.

    You should be comparing the 15 year mortgage option vs 30 year mortgage option that you COULD have refinanced into. The number isn't going to be 270K but probably closer to 20 or 30K if I had to guess.

    If that is the case I'd give up 20K for the course of 30 years for that type of flexibility.

    • Evan,

      Thank you for the comment!

      Though I didn't specify in this post. I did compare the 30 vs 30 option. But, the 15 year made much more sense. I agree with you to a degree on your flexibility point. But, in my personal situation flexibility was second to paying off the home faster. That's the beauty of personal finance, there really is no right or wrong answer as long as you reach your goals. Oh and the 30 year mortgage was 4.1%

      • If I had to guestimate your mortgage is around 385K. If you do the 15 year 3.375% (great rate btw) you pay $104K in interest…if you do the 30 year your payment would be around $1800 but then you put the extra 900/month towards principal (about the same payment you can play with the calculator) you pay $144K in interest.

        Your savings is $40K that is what I meant.

        • Ahh.. I see what you're saying now. I should have shown a few more examples. ie.. Old 30 Year mortgage vs New 30 Year Mortgage; Old 30 Year Mortage with New 15 year payment vs New 15 year mortgage; and Old 30 year mortgage + added principal vs New 30 year Mortgage + added principal and so on and so forth. But like most people I probably would not have added an extra payment or all the additional principal I should have. So I wrote the post based on how I would have acted 2 years ago.

          • Evan's comment is where I was headed. You're right, it's personal…I had so many clients who chose different options after we did all the math. In my case, I would have taken the 30 year but made automatic payments based on a 15 year schedule. That way, the payment is still made based on 15 years but if I lose my job, the mandatory amount I'd need to pay would be lower.

            The "invest it" option is too risky for me personally (I love your "bought a bond" quip….awesome). – Joe

          • Ahh But Joe we are investing tons of moola per month already. In my last "Lazy Sunday Weekly Recap #1" I am actually pissed that I didn't choose a 10 year mortgage. So as of now we are paying a 15 year mortgage like a 10. But, we will end up paying it off in 12 years. In case of a job loss we are covered. Our worst case scenario I can go 2 years without a job (highly unlikely). Maybe I should have been a bit more open about our financial situation before making this post. Many people assumed that by taking the 15 year we weren't investing a lot already. But, there comes a point were you might as well just accelerate the debt payment. we definitely are at that point in our lives. Heck we just paid off a car that had a 1.99% interest rate on it. No reason except my wife said she would feel better without a car note. so you know what I did? I cut a 10k check to pay it off 🙂 What is that saying.. happy wife happy life? Yea that's the one. At least it freed up 500 dollars a month…

          • I don't know that one. I just know "if momma ain't happy, NOBODY's happy."

            1.99 percent beats lots of investments lately…..and zero risk.

  • Eye catching title, haha! Sounds like you made a great decision based on your situation. Interesting how the numbers can differ so dramatically when doing comparisons. Bottom line, everyone should do their due diligence and choose the option that makes the most sense to them.

  • EASY WAY TO SAVE $270,000…

    What a title!  Honestly the number is more like $267,793.86 but $270,000 sounded so much better.  You may be wondering how in the world did YFS (Your Finances…

  • Good Afternoon,

    Your submission has been included in the Money Go Round Carnival November 2011:
    http://www.helpmetosave.com/2011/11/money-go-roun

    As agreed when submitting can you please link back to the Carnival to give everyone more exposure.

    Thanks Karen

  • […] describes how he saved his family $270,000 by ditching a higher rate mortgage payable over 30 years to a mortgage with a lower interest rate […]

  • Lazy Sunday Weekly Recap! #1 | Your Finances Simplified /

    […] out our home loan that we just refinanced on 10/10/11 from Amerisave.com was sold to Citi Mortgage as of 10/31.  Wow […]

  • I refinanced both my primary and my rental in the past 30 days in the low 3%. Did you pay any closing costs other than interest or points?

    • No closing costs or points. I actually received a kick back at closing. What institution did you refinance your rental properties with? I currently use a credit union for my rental properties and the best I can find is 4.75% HELOC.

  • We are looking at selling not refinancing in a few months. Amazing how powerful compounding interest can be! Congratulations!

  • I am looking to either sell or win a tax appeal to get in the green. It's tough owning a home in Newark NJ. Every other day there is some bad press about it. However it's like NYC of the 90's. There are some great parts.

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